1. Global Marketing Contemporary Theory, Practice, and Cases
By Ilan Alon, Eugene Jaffe, Christiane Prange, and Donata Vianelli

2. Global Placement and Distribution Channels
Chapter 12
Global Placement and Distribution Channels

3. Learning Objectives After reading this chapter you should be able to:
Understand the role of distribution in the international marketing mix.
Identify the main internal and external factors influencing distribution decisions.
Understand how to manage global placement and international distribution channels.
Evaluate different types of channel intermediaries.
Recognize the existence of differences in the retailing system of different countries.
Analyze the internationalization of retailers.
Describe the main activities related to physical distribution.

4. Power of Distribution
Distribution channels are the organizations, agents, wholesalers, retailers, etc., who move the product to the final consumer. Physical distribution involves logistic activities such as transportation, packaging, inventory, and storage of the product to be exported to another country. International distribution networks should concentrate on giving the final customers product information and accessibility, maintaining profitable distribution, partner relationships, and strengthening the company’s global marketing strategy. What kind of influencing factors have to be taken into consideration when designing a distribution network internationally? Which managerial factors are relevant in channel and logistic decisions? What is the involvement level of retailers in the internationalization process?

5. Factors Influencing International Distribution Decisions
A company has to evaluate the most suitable channels in terms of structure, management, and control.
Internal factors:
The international marketing strategy of a company, with a given entry mode strategy and a degree of control that the company aims to reach
The distribution strategy, mainly influenced by objectives of market penetration, by the competitive structure, and by the financial strength of the company
The product complexity
The size and development of the company's marketing and sales functions (export department)
External factors:
The characteristics of the distribution system
Local regulations
The stage of the product’s life cycle
Consumer purchasing and shopping habits
Market size and density of population
The competitive climate

6. Internal Factors Company entry mode Distribution strategy
Less risky modes of entry can force the company to delegate its distribution choices to a foreign partner
Intermediate entry modes, strategic alliances, franchising agreements, joint ventures, or greenfield investments allow the company to develop direct or short distribution channels
Distribution strategy
An intensive distribution strategy occurs when producers use as many outlets as possible
e.g. Michelin Group, Vodafone
A selective distribution strategy is based on using fewer but selective intermediaries
e.g. Valentino Group
With an exclusive distribution strategy, the producer gives a limited number of retailers the right to sell its products in their specific territories
e.g. Inditex

7. Valentino: An Example of Selective Distribution Strategy
Valentino in Neiman Marcus (a U.S. department store
© author

8. Internal Factors Product complexity
Exporters should differentiate their relationship with intermediaries, because complex products require extensive information exchange and interaction in order to solve functional problems related to product delivery, installation, and after-sale service.
Organization of the export department
Defined by the number of managers employed in the department, their international professional background, marketing skills, and their operating budget.
A simplified export department will tend to opt for indirect distribution choices using local intermediaries and delegating to them all distribution activities despite lower control over the target market.

9. External Factors
Differences in the distribution system, logistics, and transportation infrastructure
Inefficiency of logistics and of transport infrastructure makes it necessary for a company to use local intermediaries. However, using numerous intermediaries means lower control over the final market.
e.g. Beer industry
Local regulations
For example, multi-level marketing in China is illegal and may be met with legal action
Stage of the product lifecycle
In the introductory stage, market penetration and market coverage are very low; in the growth stage, selective distribution is recommended, while in the maturity stage, intensive distribution is usually required

10. External Factors Purchasing and shopping habits Competitive climate
These habits are deeply rooted in the country’s culture and are difficult to change
e.g. Walmart’s international investments
Competitive climate
Distribution strategies can also be influenced by choices made by competitors
Competitors may have exclusive contracts with local retailers or wholesalers or may own their sales channels
e.g. Shiseido
Market size and density of population
The distribution strategy Procter & Gamble developed to target rural China demonstrates how the company’s success in relation to competition has been determined by its ability to develop distribution strategies that target a huge market with a rural population spread.

11. Managing International Distribution Channels
Advantages and disadvantages of different alternatives:
Direct versus indirect channels
Conventional distribution channels versus vertical marketing systems (VMS)
Selection among different types of intermediaries (agents, wholesalers, and retailers) identifying which ones are considered more suitable
Direct and Indirect Distribution Channels
A channel is indirect when one or more intermediaries (i.e. agent, wholesaler, retailer) are involved in the transaction. The channel can be short or long, depending on the number of intermediaries used by the company.
The length of a distribution channel is determined by the number of levels and types of intermediaries
The width of the channel is defined by the number of intermediaries of the same typology operating in the channel

12. Alternative International Distribution Channels
DOS (Directly Operated Stores)
Manufacturer
End user / Consumer
Telephone, mail orders, door to door, internet
Manufacturer’s sales force
Agent
Retailer
Wholesaler 1 7 3 5 8 6 2 4

13. Direct Channels
The direct marketing channel has been developed through the growth of Internet selling (Alternative 1).
With the necessity to create brand value and differentiation against competitors, directly operated stores are acquiring significant importance (Alternative 2).
e.g. Armani in the form of flagship stores
If a company has a limited number of customers, it can serve the market directly through a specialized internal sales force or through a global key account organization (Alternative 3).
Direct control is typical for industrial goods
Purchasing offices: controlling its purchasing activity backward through agents that are internal to the company

14. Conventional versus Vertical Marketing Systems
Conventional distribution channel: intermediaries are independent and act as if they are running a separate business: the manufacture is in charge of manufacturing and selling, the wholesaler develop only wholesaling activities, and the retailer manages the store.
Vertical marketing system (VMS): intermediaries are linked in a unique integrated system that favors cooperation and synergies
Control can be developed as a corporate, contractual, or administrative VMS
A vertical system is usually required in situations where it is necessary to manage a complex product both in the sale and after-sale phases.
A manufacturer can increase the control of its sales process by integrating distribution activities
When the retailing format available in the foreign country is not suitable for its goods, a company can opt for forward integration through owned stores (directly operated stores) or franchising.

15. Multichannel Strategies
Companies usually define multiple channels (direct and indirect, with different types of intermediaries), and choose the more suitable channel organization (conventional or vertical).
e.g. Italian company Ferrero, L’Oreal
One of the main issues in a multichannel strategy is the coordination necessary in order to convey the same message to the final consumer.
e.g. Allstate Corporation
© author
L’Oreal advertising in Venice

16. L’Oréal Example Distribution channels Brands Hairdressing salons
L’Oréal Professionel, Kérastase, Redken, Matrix, Mizani, Pureology, Shu Uemura Art of Hair, Essie, Carita, Decléor
Mass retailing channels: hypermarkets, supermarkets, drugstores and traditional stores
L’Oréal Paris, Garnier, Maybelline New York, Softsheen.Carson, Essie
Cosmetic stores, travel retail, department stores, own-brand boutiques and dedicated e-commerce websites
Lancome, Biotherm, Helena Rubinstein, Diesel, Giorgio Armani Beauty, Yves Saint Laurent Beauté, Kiehl’s, Guy Laroche, Ralph Lauren, Cacharel, Shu Uemura, Clarisonic, Victor Rolf, Paloma Picasso, Yue Sai, Maison Martin Margiela, Urban Decay.
Pharmacies, drugstores, medi-spas
Vichy, La Roche-Posay, SkinCeuticals, Sanoflore, Roger&Gallet
Directly operated stores (DOS)
The Body Shop
Sources: Adapted from: and retrieved on January 17, 2015

17. Types of Channel Intermediaries
Agents: operate in the name of the company but do not take title to the goods they sell
Offer a limited service and usually work for a commission
Wholesalers: take title to the goods and sell them to customers buying for reselling or for business use
Play a fundamental role in bridging the gap between demand and supply
It is important to consider the power concentration of wholesaling activities
The degree of vertical integration influences the power of a foreign wholesaler
Retailers: manage the final link between the provider and the consumer
There can be wide differences in the retailing format between countries due to local shopping habits, lifestyle, economic progress, and local regulation
e.g. Emerging markets and developed markets
There can be differences in the retailing formats also inside the country

18. Example of Traditional and Modern Retailing in China
© author
© author

19. Manufacturer Alternatives
Independent retail intermediaries
Partnerships with some global retailers
For example, Unilever expands in international markets through the continuous internationalization process of global retailers
Introducing innovations while focusing on a retail format
E.g. Beiersdorf, LU biscuits
Leased concession
A “boutique” operated by the brand is located in a larger store
Wholly owned stores (DOS—Directly Operated Stores) or franchising networks
e.g. Bulgari
Choice of a famous retailer
e.g. Maria Sharapova’s brand, Sugarpova, in the New York store Henri Bendel

20. LU Biscuits Example
LU biscuit brand in a Chinese supermarket
© author

21. Internet Retailing
Internet retailing is generating about 5 percent of global value, and it is constantly growing
United States is definitely the largest market, but also countries like China are rapidly catching up, and e-commerce represents an opportunity also for other emerging markets.
Comparing developed and emerging markets, also consumers shopping behavior is different. For example, in mature markets internet retailing is mainly preferred because of price and flexibility, while in emerging markets, brands variety is the most important reason. Nevertheless in these markets e-commerce has to face the problem of consumers’ low trust in online payment security.
One of the companies that has undoubtedly paved the way for Internet selling is Amazon, followed by other three big players of internet selling, i.e. Tmall, that is part of the Chinese Alibaba group and has 45 percent of internet retailing in China, eBay and Apple.

22. Internationalization of Retailing
The prerequisite to manage the development of an international network is the creation of a store brand value recognized by foreign consumer.
Retailers have to identify the best mode to enter a foreign market. There are five alternatives:
Investment with a minority control
The retailer is usually in its initial stages of internationalization and has limited knowledge of the local environment and low expertise.
Directly operated stores (DOS)—Greenfield investment
The retailer chooses to open one or more stores in important locations creating store brand awareness in the most attractive markets.
Franchising
The retailer signs franchise agreements with local business partners, providing the store brand and the format, marketing support and training.
Joint Venture
Retailers can enter a foreign market through a joint venture with a local partner.
Acquisitions—Brownfield investments
Retailers can buy a local retail chain gaining immediately access to the foreign market.

23. Main Decisions of International Retailers
Country and firm level factors can significantly influence retailers’ internationalization.
Standardization / adaptation issues:
the growing globalization of consumer goods is seen as one of the variables that will gradually encourage standardization.
the analysis of local markets clearly points out that format adaptation (i.e. the adaptation of the style, design, layout, and assortment of the store) is an almost necessary choice.
need of adaptation of the local offer in terms of assortment, promotion, and selling techniques.
In general, it is important to analyze if consumer perceptions of core attributes of the retailing format differ between countries and how a retailer can adapt to these variations (see the example of Carrefour).
Global retailers face a highly competitive environment in their internationalization process, also by local retailers. Hence:
global retailers can choose to develop local strategic alliances.
global retailers invest time and resources to identify differences in the host countries, and adapt to these differences crafting their strategies and their operative decisions.

24. Local Assortment in a Carrefour Supermarket in China
© author
One of the reasons for its success internationally is attributed to its ability to adapt to local reality, to understand its needs and purchasing behaviors and adapt both format and assortment

25. Physical Distribution
The primary objective of physical distribution is to manage the movement of finished products from the company to its customers.
In some cases, bureaucratic obstacles become strong entry barriers that foreign companies can overcome only with alliances with local partners that support physical distribution activities.
Where there are poor transportation and logistics standards, foreign companies have to face inefficiencies that can significantly affect their costs.
In China and India, transportation and logistics remain difficult not only in the countryside but also in fast-growing cities.

26. Transportation of Goods in Beijing

27. Logistics
The need to improve physical distribution efficiency is strongly felt in most of the companies that operate on an international level:
cost control has become more critical
there is an increasing need to distribute products quickly to customers and to guarantee high quality service and sustainability in moving everyday millions of products from factories to the points of sale
Some companies have turned logistics into a corporate philosophy
e.g. Spanish group Inditex
In the business to business there are companies where the logistic system is a key element of competitive advantage.
e.g. Dutch company Flora Holland

28. Flora Holland
Flowers and plants ready to be delivered after the auctions
© author

29. Discussion Questions
1. What are the external factors influencing international distribution decisions?
Take the example of a foreign brand that is marketed in your country: compared to other countries, which local factors have to be taken into consideration when defining distribution decisions?
2. What are the advantages and disadvantages of direct versus indirect distribution channels? Discuss and give some examples of brands using one of the two channels or both.
3. How can companies be successful developing a vertical marketing system (VMS)? What are the main risks? Discuss some examples of global companies successfully implementing VMS (for example, Inditex Group–Zara, or McDonald’s).
4. Discuss the problem of coordination of brand image in multichannel strategies.
5. Discuss advantages and disadvantages of using an agent to enter foreign markets.
6. Discuss advantages and disadvantages of using a wholesaler to enter foreign markets.
7. Compare two different global retailers operating in your country and describe their competitive advantages.